Canada: Directors Need To Meet High Standard To Avoid Liability

The Tax Court of Canada again confirmed that directors of
corporations will have a high burden to meet to establish a due
diligence defence and avoid liability for unremitted source
deductions.

In Maddin v The Queen,2014 TCC 277, the taxpayer was a director of a
corporation that failed to remit nearly $300,000 of employee source
deductions. The only issue before the Court was whether the
taxpayer exercised "due diligence" under subsection
227.1(3) of the Income Tax Act (Canada).

The taxpayer sold a portion of the shares in a corporation to
two other individuals, but remained a director so the company could
benefit from his experience. The taxpayer argued that his intention
was to play a limited advisory role in the corporation, and another
director was in charge of managing the daily operations. However,
the Court found that: the taxpayer was in the office 2-3 days a
week, effectively spending more time in the office than the other
directors; he was familiar with the company's business
structure, its banking operations and accounting systems; he had a
close relationship with the initial bookkeeper and communicated
with her throughout the period at issue; and when a new bookkeeper
(the mother of another director) was hired and the initial
bookkeeper fired, he was aware that she did not necessarily
understand the bookkeeping systems.

The Court also found that the taxpayer had previously failed to
remit source deductions, and knew the company was experiencing
financial difficulties, but seemed more concerned with collecting
the money the corporation owed to him than ensuring the corporation
was remitting its source deductions.

The Court held that these factual circumstances should have
prompted the taxpayer to inquire into the financial health of the
corporation and ensure the source deductions were being remitted.
Neglecting to make inquiries as to the status of the payment of the
source deductions was insufficient to establish the taxpayer took
reasonably prudent steps to discover the source deduction
arrears.

This decision serves as a reminder that courts will generally
hold directors to a fairly high standard of conduct. It will not be
enough for a director to suggest he or she was not intimately
involved in the day to day operations of the company. Rather, in
order to establish the exercise of due diligence, a director must
make inquiries into the financial state of the company and speak
regularly with staff to confirm that source deductions are being
remitted as required.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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